Greenspan Conundrum Explained

There has been a lot of wringing of hands and blog chatter on Greenspan confessing he couldn't explain why long term rates have stayed low.  His conundrum is not that hard to figure out, but perhaps not the best thing to openly discuss.  The Dollar is used as the international exchange currency. The US can run a persistent 6% trade deficit for an expended period due to the demand for Dollars as a reserve currency.  China has begun moving away from the Dollar to a basket of currencies, which is sometimes called YE$ for the Yen Euro and Dollar, although the China basket is broader - they are attempting to reserve in rough proportion to their trading partners.  There is, however, one trade they cannot diversify away - oil. The oil trade is in Dollars.  (Iraq for a time tried to move to Euros, and look what happened to them.)  As their demand for oil increases, and especially as the price of oil in Dollars increases, they need those greenbacks.  Oil has gone up considerable recently.  The Dollar itself is once again rising, as it has been since Dec04.  Perhaps inflation is also rising, which should cause long term rates to rise - although whether there is core inflation is unclear. What is clear is that the demand for Dollars shows up as bids for US Treasuries, propping up the value of the long bond and keeping rates low. Q.E.D. 

If this continues, the long bond will drop below 3% before it sees 5%.  Such a conundrum!

Comments

[EN]

I bought 10 year T-notes because I think they are going higher based on the price pattern. Interesting to see that there may be some fundamentals driving the price action.

[Rich]

Rubbish!
As long as the US is running a trade deficit, foreigners as an aggregate group cannot get out of the dollar. They either have to buy more US produced goods (which they are obviously not doing) or invest their excess dollars is US real-estate, stocks or coporate bonds or US Treasury securities (which they are obviously doing).

[Ed]

Anyone know what the (STU) is saying the market is doing here.

Any current Wolf calls?

[EN]

I don't know how they could justify any wolf call since the early august high we have 3 down to Katrina, 3 up, 3 down to Rita and now 3 up about to finish. That said, I don't know since I gave up my sub a long while back.

[yelnick]

I will post an update this weekend. For those who cannot wait, the summary is: market is in a bearish diamond formation, similar to what was seen in 2000 at the top. Then, it hovered around Dow11K for 2 years. Now, for 2 years around Dow10500. A break below Dow10300 could lead to a meltdown. Although they do not highlight this, the pattern could continue into 2006 before breaking. If you look at other ewave sources, including Neely, this breakdown may happen next week, although Neely does not expect a break below the Oct02 lows. If you look at broader market trends, this is more likely to last beyond Greenspan resigning in early 2006.

[Ed]

Neely is calling for a crash here?

[EN]

I see a triangle such that Friday's action is D wave UP with E wave down imminent this week comming. Then big october-november rally to finish off the cyclical bull at 1265-1300. That is, final C wave up has yet to start, unless yearly high taken out before a fade back to 1220. The yearly high WILL be popped before this sucker goes down - forget the diamond. More like a rising wedge.

[Shel]

Ran into former colleague at Urban Outfitters this pm with his daughters and asked where he's investing. He made a killing in the 1990s in tech stocks and pulled out before the drop. He said he was as bullish as ever. Guy is smart and usually pretty skeptical, so I'm inclined to think the bearishness I sense in friends and on boards is overdone. By the way, Urban Outfitters carries this black paperback Saving Face I think is the title but it's a guide to awkward social situations. Funny sh*t, especially the chapter on sex. They should have done a chapter on money.

[Buy the Dips]

Theres not many Blog titles left you can use for future Prechter wolf updates. You could always start using Roman numerals :)

Son of the Ghost of Wolf meets return of the Wolf Wolf Part XXVI